‘Credit invisibles’ are being offered new ways to build their credit identity

Being invisible to the financial system might not sound like a bad thing. But for some people on low incomes the consequences are profound, locking them out of basic services like credit cards or mobile phones and often forcing them to pay over the odds for their energy bills.

When Sammy Gillmore was in her 20s, she saw credit cards as a useful way to afford things. “I got one credit card that led to another one, and another one. I got in a mess and couldn’t pay them off. That’s how I started getting into bad debt.”

She took the decision to clear up her debts, paying off and cancelling her last credit card, then she stopped using them altogether. Despite having taken what she felt to be the best course of action, the 36-year-old consequently found it difficult to get credit, even years later. This became particularly frustrating when she needed to replace her dishwasher and opted to use the retailer’s credit scheme to buy a new appliance and pay it off in instalments.

She was rejected because she had both a low credit score and what’s known as a ‘thin’ credit file. With no credit cards, bank loans or other forms of credit to her name, her financial history was too scarce to get credit, even for a relatively small purchase like a dishwasher.

While she could have taken out a new credit card and built up her history that way, Sammy was reluctant to use one again after what had happened in the past. Eventually she was able to use Fair For You, the not-for-profit loans provider which was set up in 2015 to challenge high-cost lending - offering loans to consumers who don’t have access to mainstream credit.

Using the scheme allowed Sammy to improve her credit history, with repayments for the dishwasher reflected in her payment history. Now she is building her financial information up again which will mean she shouldn’t have similar problems in the future.

“There are over 5 million people in the UK and an estimated 50 million in the United States who have a nonexistent or limited credit history,” explains Lloyd Pitchford, Chief Financial Officer at Experian.

“Without an existing credit report, lenders can’t verify a consumer’s identity and consumers are unable to access credit at fair and affordable rates. Often, these consumers are caught in cycles of predatory lending, can’t cover emergency expenses and face limited housing options, higher insurance premiums and interest rates, employment challenges, larger deposit requirements and more.”

These ‘credit invisibles’ may also have problems accessing crucial public services because some organisations use online identity verification checkers based on a credit report.
It’s not just those on the poorest incomes that are affected by this issue, the UK’s 'Credit Invisible’ population comes from a variety of backgrounds, including:

• Young people who have not yet established a credit record.
• Older people who may have either paid off their mortgage and have limited use for credit, or who have not previously relied on credit and, therefore, have no file.
• Recent immigrants (or potentially returning expats) who may have little or no credit footprint, and therefore struggle to open bank accounts and/or rent property.

The challenges facing credit invisibles have been intensified by the cost-of-living crisis, and the impact of inflation and soaring energy prices.

The problem is clear – so how do we go about solving it? Part of the answer is finding new and innovative ways to help people to start building up their credit history. There are a number of credit builder tools now available to support this, including CreditLadder which helps you build your credit profile through rental payments, Loqbox which does the same through savings and Portify which offers a membership fee model.

In the US and the UK, Experian Boost now allows people to use their track record of paying for things like their monthly subscriptions for Netflix or Amazon Prime to take the first steps to building their credit profile.

To further financial inclusion across the United States, Experian launched Experian Go™, a free, first-of-its-kind program to help people with no credit history, begin building credit on their own terms. The app gives users a portal to start to accumulate information on which a financial identity can be built, as well as offering them useful financial information and education.

“Living with a non-existent or limited credit history can be a significant barrier to financial opportunity,” Adds Pitchford. “We believe every individual deserves the chance to reach their fullest financial potential. The solution to this issue lies in a combination of credit education and the use of new relevant information to help build out credit files and improve financial access for all.”